Setting the Right Fee – Game Plan • Setting the context • Who cares? • Factors that affect your fee • Principles that drive your fee • Calculating and arriving at your fee • Negotiation • Your contract • Post mortem on the project
Context • Fees and Services ‘challenge’ • Professional fees generally
– Current vs. Historically – Anecdotally – “Succeeding by Design”
• Historical reliance on “Fee schedules” – Dream of “good old days” – % age of construction cost – Hourly rates c.f. other professions – Varying scope project to project – Clients, Colleagues and the Marketplace – Commoditization
1960
2005 20%
Context • Why the pressure on professional fees?
– Cyclical economy impact on design/construction sector – Increased competition – Client needs/demands changing – Complexity of practice – red tape world – Lack knowledge of “business basics” – lack training
• How P/L relate to fees charged/cost of delivering services • Practice management • ‘Supply and demand’ • Profit margins … “starving artist”
– Managing Risk and Reward – SMALL BUSINESSes!!!!!!
Challenges to Creating a Fee Schedule
• $ Ranges, Variations in Construction Cost • Building Type • Project Delivery Model • Construction Delivery Model • Scope of Services • Complexity • Approvals • Client • Risk (and reward??)
Although …
• Not enforce (but … ) • Fact-based, data based on market research • No collusion • OGCA “qualified bids”
Why YOU Need the Right Fee • Deliver the professional services • Maintain high quality • Meet standards of the profession • Architecture is a business
– Compete – Solvent – Revenue v. expenses
Why YOU Need the Right Fee • Deliver the professional services • Maintain high quality • Meet standards of the profession • Architecture is a business
– Compete – Solvent – Revenue v. expenses
• Human resources – staff, contractors • Consultants • IT – hardware and software, internet, cloud • Insurances • Promotion and Business Development • Premises, FF and E • Advisors
Why … • Profit is not a “dirty word”
– Sustain • Taxes • ROI • “slow times” • Change management
– Business Development
– Invest and reinvest • Recruit and retain HR; training and continuing education • IT – capital and implementation • R and D
– Grow and expand – Reward – Retirement
Factors that Affect YOUR Fee
• Scope of professional services • Building type • Complexity … New? Reno? Systems? • The team • The client • Competition • Construction procurement model • Schedule
Factors that Affect YOUR Fee
• Special requirements e.g. BIM • Approvals • LCC, Operations and Maintenance, LEED, and third party certification
• Phasing • Prototype? • Patents • RISK (and reward?)
Factors that Affect YOUR Fee
• Location • Pursuit costs • Project delivery model • Expectations of profit, ROI • Business strategies • Repeat work • Client rep, their authority, involvement • Client expectations
Principles that may drive YOUR fee • Value • Reputation • Quality • Innovation • Philosophy … sustainability, CSR, altruism, professionalism, “Architecture Matters”
• Interests, practice focus • Objectives • Strategic Plan
Calculating …
• RAIC Guide – lagniappe
• Hourly • Work Breakdown Structure • Output • Unit • Market fees
In Principle
• Fee = %age of construction cost – Net of engineering fees, includes coordination only
– Incl S, M and E – Can translate to a fixed fee
• Building Type – 7 • Construction Cost ranges • Simple, Average, Complex • Adjustment Factors – 16 – (plus)
Adjustment Factors
1. Scope of Services 2. Project Delivery Method and Construction
Procurement DBB Sequential DB P3 Other
3. Schedule and Fast-Track
Adjustment Factors
4. Project Documentation & Computer Modeling
5. Specialist Consultants – coordination (plus?) 6. Approvals and Authorities Having
Jurisdiction 7. Submittals 8. New Technologies 9. Construction Administration
Adjustment Factors
10.Project Location and Site Conditions 11. Renovations v. New 12.Repeat Work 13.Architect’s Personnel Expertise, overtime, project office
14.Demobilization/Remobilization 15.Phased Occupancies 16.Full-time On-site Review
Lagniappe
Use Other Adjustment Factors RISK Reward Client Reputation, expectations, representative, etc.
LEED design LEED certification LCC Innovation
Billing Rate
Hourly labour rate x benefits $25 x 35% = 8.75
+ Hourly rate x overhead $25 x 120% = 30.00
+ Hourly rate = 25.00
Break even cost = 63.75
+ Profit (20%) divide by 80% = 79.68
(Brian’s recommendation: rationalize - either $79 or $80)
Billable Hours
Total available 40 hrs x 52 weeks =2,080
Vacation (3 weeks) - 120 hours =1,960
Stat Holidays (8 days) - 64 hours =1,896
Sick leave (assume 6 days) - 48 hours =1,848
Net Work Hours =1,848
Utilization factor (assume 60%) 1848 x 60% =1,109
So, total estimated Billable Hours =1,109
Blended Rates
Expectation $ 75,000
Annual Overhead $ 45,000
Break-even $120,000
Profit $ 18,000
Total Fee Billings need to be $138,000
Blended Hourly Billing Rate
$138,000 divide by 1109 hours $124.44
• Work Breakdown Structure – 5,540,000 – 1960’s NASA – Very common PM tool – “translated” to architecture
Work Breakdown Structure
Work Breakdown Structure
• Complex projects – need to scope – price – manage
• Break it down – phase-based – function-based - discipline-related categories
• working in all disciplines at once • none finished until all finished
WBS
Task 1Task 2Task 3
Subtask 1
Work package 1
Individual Effort 1Individual Effort 2
Work package 2
Work package 3Work package 4
Subtask 2
Subtask 3Subtask 4
Task 4
Task 5Task 6Task 7
SubProject A SubProject B SubProject C
Overall Project
Guidelines for WBS • start fresh • start with master list - BUT … • list every task • maximum 7 to 10 at any level • don’t forget Project Management as task • differentiate tasks vs. deliverables • document all assumptions
• don’t over-detail -- $$$$$
“Nailing” the Scope
• what is INcluded • what is EXcluded • what is “optional” • ‘by others’ • Deliverables, benchmarks
Relate to your historical data • But … danger in historical data … project variables, e.g. – Site and Context – Function and Program – Equipment and Content – Envelope and Systems – Design Process, Innovation, Unique – Procurement method – Construction – Additions and Alterations
– People!
Back to WBS - Task Duration
• Which staff? – capability – hourly rate – competing assignments, availability
• Historical records – Who? How much?
• Estimates by PM, staff – ‘buy-in’
‘Bottom-up’ the Fee
• Use the labour cost only to extend against each task, then:
• Add Overhead • Add Other Direct Costs (e.g. consultants) • Add Contingency • Then, add Profit to that subtotal for your total ‘bottom up’ fee
So … what to do? • WBS disadvantage is tendency “too cautious”
– Remember, investment in WBS pays off in PM
• Reality check … – Public record, e.g. municipalities, Boards – Surveys done by private sector – Ask the client – in negotiation, debriefing – Ask the market – Does client have a budget? – Historical data in the practice, or previous … – Hit ratio – Business performance indicators, e.g. profit
Value-Based Fees
• Your favourite developer … • Fees are dependent on 2 things … perceived value for services AND the parties acting ethically
• Perceived value … in the client’s terms … over the long term
• Time spent, deliverables created, materials invested do not translate to value – “Time & materials”
Value-Based Fees
• Selling expert knowledge and specialist advice … not your time
• Time billing caps your income • Value proposition = BENEFIT to client, NOT what you are able to do
• “Value for Money” – Know Client’s Objectives • Benefits to Client ÷ Fixed Client Cost = Value to Client – E.g. faster project = additional business revenue – E.g. track record of fewer RFIs and COs – E.g. home value – E.g. productivity
Value-Based Fees
• USP • Price life cycle
• Not customer-led
$
Life Cycle of Service
Breakeven
R and D High Profit Competition Commodity
Value-Based Fees • Fees – not ‘necessary evil’ … fair exchange for value you’ve given client
• Win-win – shared success, Risk and Reward • Other examples of VB fees
– The developer – Success fee (P3,D/B) c.f. contingency – % age of savings “efficiency experts” or tax consultants or value-engineering
– “Good design = good business” – Investment based – bring equity
• Changes in industry/services/needs create opportunities to shift to value-based
Establishing YOUR Value
• YOU need to establish your value • Rental Income
– 3,000 sf retail, sales $37/sf/month – Competitor’s fee is $18,000 (6% constr’n cost) – YOU can save 2 months – 3,000 x $37 x 2 months = $22,200 – So your fee is … ????
Establish YOUR Value
• Productivity • Home Value • Life Cycle Cost • better track record re COs • Developer … able to bid higher
Applying Value-Based Principles
• RAIC Guide – Many of the Adjustment Factors – Many of the lagniappe – And more!
Now What?
• Yo-Yo – Disadvantage of WBS and pricing – too cautious – Market Price (how?) aka “Top Down”
• Public record • Surveys • Ask the client how you compare
– Your own historical data
Now What?
• “Adjust” the Fee – save ‘profit’- DON’T just give it up!!! – watch the contingency – be realistic!! – Unless it’s a conscious decision to under-price
But ...
• Commodification • Loose scope • Recommended hourly rates • Disconnect %age of construction cost vs. Reality
• Add scope in negotiations, no change to fee
• Colleagues
Negotiating
• Deal vs. Relationship Negotiating – “win-win”
• Juggle • Prepare • Know your bottom line • NOT just about fees and clients …
A Good Negotiator
• desire • understands the skills • understands both sides under pressure • desires ‘win win’ • knows her/his contract • researches client and project
Prepare
Things • you want from the client • things you will not give up • things you are prepared to trade • things you can ‘throw in’ • things client can ‘throw in’ When you’ll walk!
Keep juggling!!
• scope - define it • schedule - speed costs • team - client wants best people • risk – business - $ and liability • Chev or Lexus? • terms - payment • price – “the last to drop”
Common Errors
• concession not always a loss • failing to acquire and apply negotiating skills
• “conceding” on fees • treating negotiation as secondary to “getting the job”
• lack of preparation • fear/discomfort
Common Errors
• yielding to market pressures • the ‘schedule’ crutch • too honest • cutting the scope to make the fee work • telephone or e-mail negotiation • “it’s all about the fee”
Tactics
• Nibble • Hot Potato • Red Herring • Higher Authority • The ‘Set Aside’ • Good Cop/Bad Cop • Flinch
• Off the table • Split the Difference • “You’ll have to do better than that …”
• Funny Money • Emotion
Closing
• Don’t close until all the ‘balls’ are resolved – keep options, eg. higher authority
• Sign on the spot • if necessary, be ready to make one last concession from your list – “in your back pocket”
10 Top Sources of Leverage
• Money – need it?
• Time – anxious?
• Competition – specialty?
• Experience – have it?
• Knowledge – client? project?
• Workload – backlog?
• Facts – evidence to support?
• Preparation – have you prepared?
• Courage – to walk?
• Appearance – fit?
Contracts
• Written contract • Standard form, minimize changes
– Legal and insurance review • Clearly define scope … have it ready • Clear payment terms • Review it in detail • Client deliverables and responsibilities • Schedule
Change Management • Scope creep • Standard contracts have no provisions
– Hourly rates or ?
• Process – If asked to do more, flag additional fees – Define scope clearly, get agreement on scope – Calculate fee based on scope – Negotiate – Confirm in writing – Change Directive
Post Mortem
• Every project! • Ask your client • Ask others on the team • What went well? • How can we improve?
Risk Management Principle 1.
• We make decisions every day and in every way – ramifications – subconscious …. “blink” by Malcolm Gladwell – “playing the odds” – what if?
• Business • Project decisions
Risk Management Principle 2.
• Pareto Principle – 80% of the effects come from 20% of the causes
– the 80/20 rule – QM
• Apply in assessing probability and impact
Risk Management Principle 3.
• Balancing Risk and Reward … • Risk is not always proportional to reward
– which project to pursue? – implement QM – sell additional services to current clients – billing practices – History – early adopters of CAD – balance of risk and reward
Risk Management Principle 4. = Strategy 1. Identify risks 2. Assess and evaluate risks – What if?
– Likelihood – Impact – Responsibility/accountability
3. Determine response - Decide – Prioritize – based on the 3-point assessment – Reduce – Reject – Transfer – Retain and mitigate (reduce likelihood, reduce impact, insure)
4. Risk Management Plan – Implement – Monitor
©2008
Risk Assessment Matrix
LOW
HIGH
HIGH
Impact
Prob
ability
Highest Overall Risk
Lowest Overall Risk
Why YOU Need the Right Fee • Deliver the professional services • Maintain high quality • Meet standards of the profession • Architecture is a business
– Compete – Solvent – Revenue v. expenses
• Human resources – staff, contractors • Consultants • IT – hardware and software, internet • Insurances • Promotion and Business Development • Premises, FF and E • Advisors
Why … • Profit is not a “dirty word”
– Sustain • Taxes • ROI • “slow times” • Change management
– Business Development
– Invest and reinvest • Recruit and retain HR; training and continuing education • IT – capital and implementation • R and D
– Grow and expand – Reward – Retirement